If you’re selling land that you think the buyer might profitably develop, overage is one way to secure a share of the future development value.
Solicitors for option agreements and overage agreements
An overage agreement specifies that as part of the sale, the original owner is entitled to a part of any future financial increase in the value of property or land. Option agreements are where either party, but more typically the buyer or leaseholder, negotiates an option (but commonly not an obligation) to purchase the property/land if a certain event occurs. This is often obtaining planning permission, but the trigger can be anything negotiated between the party.
How an overage agreement works
For the overage agreement to be effective, the correct legal framework will need to be put in place and there are many considerations and matters which will need to be negotiated. This will ensure you are legally protected. Assuming the overage is realistic, there are lots of issues to sort out. For example when is the clawback (additional amount of money) actually paid to the seller? Is it when planning permission is granted or is it when the property is built, or when it is sold? |s there a prospect of further development after overage has been paid?
We can help you negotiate an overage agreement that reflects the true value of land. In many cases, the estate agent will leave these issues to your lawyer to explore whether any agreement is possible.
For the overage agreement to be effective, the correct legal framework will need to be put in place. This will ensure you are legally protected.
Property Option agreements
An Option Agreement may be commercially appropriate where a potential buyer considers that the value of the land is significantly dependent on obtaining planning permission which is not currently in place. So, the buyer will commit, via an option agreement, to buy if planning is successfully obtained. The buyer will also want to ensure that the land/property is not sold to another buyer whilst they are trying to obtain planning permission.
Option agreements are often sought by developers over land and are also sometimes appropriate with commercial property leases. For example, if the landlord agrees, tenants may rent business premises with an option to buy the landlord’s interest.
From a seller perspective. options should not be given lightly and there is often a lot to negotiate and include in an option agreement..
There are 4 different types of option agreements:
- Call Option – this is where the buyer had the right, but no obligation, to buy the property/land.
- Put Option – where the seller has the right, but not obligation, to sell the property/land to the buyer.
- Cross Option – the buyer receives a Call option and the seller gains a Put option in return.
- Reverse Option – Occasionally these are used to secure an overage payment. The seller receives the option to purchase the property/land back after the ‘trigger event’ occurs, if the overage payment is not forthcoming. The re-sale price will reflect the increase in value of the land/property back after the trigger event.
There is a lot of room for creativity in negotiating the right deal and this is where experienced property lawyers, like ourselves, can add real value. A few examples of agreements made by our clients include :-
- where potential buyers are given the right of first refusal. For example, a landlord granting a tenant the option to buy before anyone else. This can be a powerful incentive for the tenant to sign the lease, but it can be frustrating for the landlord.
- negotiating the option price. Will you set it now, or agree a formula for determining it based on outcome such as planning permission?
Option agreements might sound simple at first glance, but they can become complicated when you get into the detail.
For help with these and all the other issues around overage and option agreements, get in touch with our property solicitors.
WE CAN HELP YOU NEGOTIATE AN OVERAGE OR OPTION AGREEMENT AS PART OF A PROPERTY DEAL
Not dissimilar in practice to an option agreement. The buyer will formally agree (and be legally committed) to proceed with the purchase (so a stronger commitment than an option and a seller may push for a conditional contract rather than an option) as long as the condition, such as getting planning permission, is obtained.